Harvard Research Paper Urges Governments and Central Banks to Add Bitcoin to Reserves to Hedge ‘Sanction Risk’

Central banks in international locations that face a threat of being sanctioned by the US might shift their worldwide reserves to embrace bitcoin (BTC), a brand new Harvard University research paper has argued.

The analysis paper primarily based the concept of central financial institution threat hedging with bitcoin on the truth that many central banks – and specifically these going through the next threat of US sanctions – in recent times have elevated the share of their reserves made up by gold, a conventional central financial institution reserve asset.

According to the creator, including a BTC allocation as well as to gold would additional improve the resilience towards sanctions for these international locations. This is particularly true in circumstances the place the nation struggles to purchase sufficient bodily gold, the creator argued.

Titled Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves, the newly revealed analysis paper is written by Matthew Ferranti, a PhD candidate in economics at Harvard University.

“The means of fiat reserve issuers to freeze transactions, which constitutes a type of de facto default on the underlying obligations, calls into query fiat reserve currencies’ standing as ‘protected haven’ property,” Ferranti wrote.

Ukraine warfare might make central banks extra all in favour of Bitcoin

In the paper, Ferranti pointed to the freezing of Russia’s worldwide central financial institution reserves within the aftermath of the invasion of Ukraine for instance of why this query is now extra related than ever.

“[…] it’s well timed to discover the query of how, and to what extent, the chance of monetary sanctions might inspire adjustments in central financial institution reserve composition,” the PhD candidate famous within the paper.

Proof-of-work is censorship-resistant

Ferranti additionally famous in his paper that bitcoin, as a proof-of-work-based digital asset, is especially helpful as a sanction hedge.

“Under a proof-of-work system, the flexibility to censor transactions on the blockchain requires attaining ‘majority hash energy,’ that means that the censor should management a minimum of 51% of the computing energy employed by all miners,” the paper stated.

It added that attaining such a standing is unfeasible “due to the sheer amount of computing energy devoted to Bitcoin mining, in addition to the quantity of electrical energy required to energy the mining chips.”

In conclusion, Ferranti admitted that no asset is “completely protected” within the presence of sanctions, however that cryptocurrencies like bitcoin can provide “some safety,” though the safety comes with increased volatility.